TMFDeej (99.47)

Why I hold on during oil's wild ride / Buy Low / Tequila...yuck

16

Man, following the markets closely can be exhausting. As much as I would like to ignore the day-to-day movement of stocks and commodities, I find it too fascinating to be able to. Fortunately, I have trained myself not to make rash decisions and panic over short-term moves, but instead to focus on the big picture.

Take a look at what has happened to oil lately:

- Ahhhh, we're all doomed, the dollar is falling like a rock and peak oil is here:

Oil soars from less than $90/barrel in January to a high of $147.

- Ahhhh global economic growth is falling off of a cliff, higher prices have created demand destruction, and the U.S. dollar is back for good baby:

Oil falls from its recent high of $147 to around $114.

- Ahhhh hurricane Gustav is going to turn the oil and gas rigs in the Gulf of Mexico into pretzels:

Oil shoots up from $114 to $120 almost immediately.

- Don't worry about those storms, if any damage is done the government will open up its Strategic Petroleum Reserve to make up for any production that it lost:

Oil falls nearly $6 from today's 9:00 AM high of around $120 to around $114.

Whew, all of this bouncing around is wild. I love to follow it and to try and understand the reasons why the market behaves the way it does, but I do not react to it. I am able to control my emotions because I have complete faith in the reasons why I purchased my long positions in this sector. I strongly believe:

1) In the long run we are a world that is addicted to oil (and a lesser extent natural gas) and it will be a long time before a viable alternative is developed. The U.S. will be unable to cut back on its demand for oil like it did in the 1970s when it actually had tons of factories that manufactured things and we our machinery was much less efficient. Demand destruction will be much, much less dramatic this time.

2) Demand growth in emerging markets will likely make up for any decline in demand that an economic slowdown in the West will produce. Even if China's growth slows down from double digits to say 9%, it still is growing rapidly.

3) There is a finite supply of oil...much of which is either in decline, in countries that are hostile to the United States, or in countries that have significantly underinvested in the infrastructure that is necessary to get at it. Again this time is different than the oil spike that happened in the 1970s. Back then OPEC had the spare capacity to open up the spigots and flood the world with oil to bring its price back down. Today OPEC, and in particular Saudi Arabia, lack the ability to meaningfully increase their production.

"Peak Oil" is for real, but not in the traditional definition of the phrase. I like to think of my version of this theory as "Peak Low Hanging Fruit." Today oil is much more expensive to get at because much of the low-hanging fruit, i.e. light, sweet, crude in easy to access land or shallow water has already been used up. Producers are increasingly having to look to new sources for oil, including shale, deepwater drilling, oil sands, etc...

I could go on, but you get the idea. In the long run, I strongly believe that the price of oil is headed higher. This conviction enables me to avoid making any knee-jerk reactions to shot-term fluctuations in the price of oil and gas. I have consolidated my positions into my favorite companies (aka circled the wagons), one of which pays tremendous dividends, and I plan to sit on them. As long as oil is in triple digits, and I don't see how it won't be long-term, these companies will make money hand over fist.

I came across an amazing chart in a Money magazine article this morning. Anyone who is discouraged by the current bear market (are we even still technically in bear territory?) needs to take a close look at it:

Investors who have invested their money in the S&P 500 over the past several decades have not realized much, if anything in the way of gains. However, investors who "load up" and purchase stocks at times when they are down have done unbelievably well. Think about this the next time you are annoyed by the stock market's anemic performance. I'm not saying that it's fun to see red in one's portfolio, just that investors who pay attention and buy stocks when they are cheap reap much, much bigger returns than those who get scared out of the market completely during rough patches.

Picking bottoms (ewwww) is not easy, neither I nor any of the other perma-bears that you see screaming from the rooftops out there will be able to do it. Has the market hit a bottom? I highly doubt it. I personally am still staying far away from certain sectors. Having said this, investors who cower in fear and completely exit the market at this point are probably doing themselves a disservice. Anyone who is in the market now will likely do much, much better than investors who bought at the top and were scared away.

Tequila Operations Trip Brown-Forman: My apologies to anyone who is long this stock, but this article screams for the line "This isn't the first time that tequila has given someone a headache." HAHAHAHAHAH.

Altria boosts regular quarterly dividend 10.3 pct: Big MO is one solid company. I personally sold my stake because I only purchased it to get at the Philip Morris International spin-off and I am a little afraid of what might happen to tobacco legislation of the Dems get control of all three branches of the government, but it's hard to argue with a secure 6% divy.

Deej, the theory you are referring to is called "Peak Cheap Oil" (aka "Peak Easy Oil") and we have gone way past peak cheap oil at this point (as evidenced by the sakhalin project and others).

Just wait until September 18, the day after the paralympics are over, muahahaha. As I always I agree with your oil assessment.

As far as bottom picking, I have a pretty damn good track record of that. My biggest investment was from cash to the vanguard s&p 500 index in april-may 2003 (almost 10k), after an exchange or two I was up over 50% in 4 years or so (before taxes of course grrr), most of that money sitting in a savings account now. I've also done fairly well in bottom picking MO, PM, WMT, DNDN, SU, and my recent picks of VE and MMM have been doing well - you can check my blog from early july on my blue chip picks that are doing outstanding. Timing the market is everything, I don't care what people say about "not being able to time the market." You don't need to hit the absolute top or bottom, but just like horshoes and hand grenades, get it around the area and you've hit your mark. :)

You just need the right tequila. Jose Cuervo Reserva De La Familia. Patron Silver. Sipping tequila, not the stuff that requires a lemon and salt (although, if said salt happened to be on the nape of a cute girl's neck, lemon in her mouth, with the tequila shot in the navel area, that is always a good tequila shot no matter how bad it tastes.)

I like MO - I don't think even a super nanny government can affect their business. Deej did I remember right you live in the NYC area? Last time I was there in april people were still smokin like a chimney. MO's bear case I think is more with a societal/medical shift in smoking, the health care industry is seriously putting huge efforts into smoking reduction with the support of government and society. There will always be kids who are looking to light up however. Also, and this might be down the road, but it may happen, if there ever becomes a complete legalization of cannabis, I would have to think that Altria/Philip Morris would be right on top of that to capitalize on the USA's #1 cash crop. (It's already the #1 cash crop and it's technically illegal - imagine the profits if it were legalized. Wow.)

PS - I'll be in NYC for halloween for a wedding if you wanna do that Patron shot. :)

As for MO I think the only dowside is growth potential, they will become more of a dividend machine. For growth PM is better. As for legislation I doubt democrats being elected will have an impact, there are just much larger issues to deal with right now than tobacco companies and smoking. When times are great society can worry about things like tobacco and who the president is sleeping with, now is not that time.